It’s official: SD out

Governor’s study shows SD’s oil potential is well below that of neighboring ND

Ray Tyson

Petroleum News Bakken

The state of South Dakota has put a damper on the hopes and dreams of explorers, concluding in a major study that because North Dakota’s prolific Bakken formation does not extend into South Dakota, potential oil development is likely far less than its northern neighbor.

The report, compiled by the office of Gov. Dennis Daugaard, was released in late September in response to widespread speculation that South Dakota is on the cusp of a North Dakota-type oil boom.

The governor specifically had two teams of state officials studying South Dakota’s potential and what the state should do to prepare for any growth. Results closely parallel conclusions of industry authorities that participated in this year’s Black Hills Bakken Conference in Spearfish, S.D. (See story on Page 13 of May 20, 2012, edition of Petroleum News Bakken.)

The Bakken petroleum system, with the advent of horizontal drilling and hydraulic fracturing, has rapidly escalated into a world-class play, with technically recoverable reserves of 3-4.3 billion barrels of oil, according to the latest U.S. Geological Survey estimates. The heart of the play is in western North Dakota, which has turned that state into the nation’s second largest producer behind Texas.

Expansion excites South Dakotans

“The recent expansion of the North Dakota oil industry due to the development of the Bakken and other oil-bearing formations has generated a great deal of interest in the potential to develop South Dakota’s oil and gas industry,” the report says.

“While South Dakota has some potential for oil and gas development and is under explored, the modest level of past exploration conducted throughout the state appears to rule out the future discovery of a ‘Bakken-sized’ oil resource in South Dakota.”

Moreover, the report adds, new exploration of northwest South Dakota — the most likely area for future development — may be delayed as operators pursue a “sure thing” in the North Dakota Bakken and other similar plays in Texas, Colorado and Ohio. Estimates on the duration of the Bakken development range from 10-to 20 years. And production from the fully developed fields will likely continue for decades more.

Study projects limited growth

The governor’s study, released to a legislative panel, also concludes that South Dakota’s oil production most likely will remain steady at the current level of 1.6 million barrels of oil a year. Even under the most optimistic scenario, which assumes extensive additional exploration, the state’s annual production will rise only to 3.2 million barrels a decade from now and 6.5 million barrels after that. In contrast, North Dakota last year produced 152 million barrels of oil.

“We will never see the oil development and gas development that North Dakota has seen, but that doesn’t mean we don’t have potential,” state geologist Derric Iles, a member of the governor’s study group, told lawmakers. “I think we do stand to see some increase in oil and gas development in South Dakota.”

Iles noted that while the Bakken doesn’t extend into South Dakota, more oil could be discovered in the Red River Formation that currently produces South Dakota’s oil in Harding County in the extreme northwest corner of the state. Two other formations, the Minnelusa and the Three Forks, also hold some promise, he pointed out. The Three Forks underlies the Bakken formation in North Dakota and is a major contributor to state production rates.

South Dakota is making drilling and other geological records available on the Internet to encourage companies to explore in South Dakota.

Rig count to remain low

In 2012, North Dakota has been averaging some 200 rigs, each drilling an average of one new oil well per month, while South Dakota currently has one such rig drilling about one new well per month. Under the most optimistic scenario developed during this study, in the next 15 years South Dakota will have, at most, six rigs each drilling an average of one new well per month. This “very optimistic” level of development, the report said, could result in about 480-720 direct private-sector jobs and as many as 72 new wells per year. In the most likely scenario, however, for the next 15 years South Dakota will continue to have one rig drilling about 12 new wells per year, employing about 80 people.

In addition to the governor’s study, the South Dakota Legislature appointed a committee that has been looking at whether any state laws dealing with oil and gas development should be changed.

Reports of the challenges in the North Dakota oil fields related to the oil boom — law enforcement, emergency services, housing, transportation, infrastructure, education and others — have led to questions about how South Dakota can prepare to address these issues as the North Dakota boom continues, and if South Dakota’s oil and gas industry expands.

Providing services for industry

Lawmakers said South Dakota’s best shot at development is to provide materials and services to North Dakota’s oil industry. For example, some South Dakota companies are making prefabricated housing for workers in North Dakota’s oil fields, and South Dakota might be able to supply sand for hydraulic fracturing.

In addition, many companies in North Dakota’s oil patch want to set up support operations outside the oil fields to escape the high costs of housing and other services in the area.

“We could see a large boom in all the other industries that are related to the oil and gas business,” said Rep. Roger Solum, R-Watertown, chairman of the Legislature’s Oil and Gas Study Committee.

However, though most of the school districts in northwest South Dakota have room to accommodate a large increase in students, it’s feared that increased drilling or other activities would stretch water supplies and law enforcement coverage. The legislative panel plans to meet again Oct. 30 to consider ideas for bills that might be introduced when 2013 legislative session opens in January.

Bonding may be increased

Lawmakers are considering raising bonding requirements companies must post to cover the cost of plugging of finished wells and restoring land disturbed by drilling. They also are looking at whether sales taxes are applied fairly to material and services used in the oil industry, and whether a mediation process should be set up to help resolve disputes between drillers and landowners.

While the governor’s report discusses natural gas development and touches on it at various points, given the weak natural gas market and the readily available supplies in many areas, it focuses primarily on impacts related to oil development and preparedness.

As part of this effort, the governor’s study group examined whether certain tax incentives or tax holidays would encourage additional oil exploration or development in South Dakota. Based on the experiences of surrounding states, evidence suggests that production and drilling tax deductions and incentives are ineffective at changing the location of oil production, the study says.

In addition to the potential for oil development and discussion of tax issues, the governor’s study also examines issues related to housing, road infrastructure, emergency services, health care services, water and electrical systems, law enforcement, education, municipalities, counties, economic development and the environment.

Any future changes to state environmental regulations should not hinder South Dakota’s potential for oil and gas development, the study says, noting: “Given the limited potential for a Bakken-size boom in South Dakota, preparedness efforts should largely focus on preparing northwest South Dakota communities for impacts related to North Dakota oil development.”